Choice of Financing in Family Firms

Abstract: Family Businesses build up a large proportion of businesses all around the world. Scholars, therefore, put much effort to study family firms. One common fact on which many scholars agree is the important role of non-economic factors in decision making processes in family firms. A theory called socioemotional wealth is developed to explain the role of non-economic factors in family firms. It suggests that the main goal of family firm, rather than maximizing shareholders’ value, is to preserve their socioemotional wealth. Socioemotional wealth can be in forms of control, identity, social relations, emotions, or passing the company to the next generations. Due to the importance of these non-financial factors in family firms, their decision making process can be different than that of non-family firms. Financing activities is one of the essential decisions in the business. The goal of this research is to find out if there is difference between choices of financing in family and non-family firms. In order to do that a questionnaire is designed and sent to Swedish companies. 171 companies, 73 of which are family firms, replied to the online questionnaire. Four regression models are designed to examine the difference in preference over 11 different sources of financing between family and non-family firms. Using the regression models and interaction graphs, moderating effects of firm size and firm age are also investigated. Result shows that family firms are different in choosing internal sources of financing and debt. They prefer those financing sources more than non-family firms. Result on external sources of financing in comparison cannot be generalized for all external sources. Moderating effect of firm age is in a same position, which means although it is supported for some sources, for others the result is not significant. Additionally Result does not support the hypothesis about moderating effect of firm size on the relationship between being a family firm and use of different sources of financing.